Analysis & Opinion

BUENOS AIRES (Reuters) - After years of nationalist rhetoric and protectionist policies, Argentina is seeking to lure foreign investment to its Vaca Muerta shale oil and gas field in an bid to jumpstart the country's energy sector and reverse a decline in output.

Just a year after stunning the market by seizing the country's biggest energy company, YPF, the government eased regulations to sign a $1.24 billion production contract with U.S.-based Chevron Corp (CVX.N).

The deal was seen as a breakthrough for Argentina as it tries to regain energy sufficiency and could be a turning point for investment in a country that has been locked out of the international capital markets since its 2002 sovereign default and has not yet compensated Spain's Repsol (REP.MC) for the nationalization of YPF.

But the government's change of course carries a political risk ahead of October's mid-term elections, a vote that will determine whether President Cristina Fernandez keeps control of the Congress. The opposition accuses her of flipflopping on core values by offering too much to the U.S. oil major.

"Argentina must move forward with shale gas development. Unfortunately, in a context where the country is no longer credible, it was necessary to give more," said a local oil consultant who requested anonymity in order to speak freely.

Chevron on July 16 inked the deal with the now state-controlled YPF (YPFD.BA) to tap into Vaca Muerta, thought to be one of the largest energy reserves in the Western Hemisphere.

To get the Chevron deal done, the government loosened up its foreign exchange regulations which have helped define the presidency of Fernandez. She was re-elected in 2011 on promises to increase the state's role in Latin America's third-biggest economy.

But in a surprising move, the government issued a decree just a day before the Chevron contract was announced last Tuesday that allows oil companies investing at least $1 billion over five years to export - tax free - up to 20 percent of the crude and natural gas they produce in the country.

Companies that explore Vaca Muerta and export from the field will also be allowed to keep their earnings in foreign exchange outside the South American country - a benefit denied to companies in other ventures, which are still required to repatriate earnings.

POLICY DEPARTURE

The policy moves were quite a departure for Fernandez, who in May 2012 shocked the oil sector by seizing a 51-percent stake in YPF from its former parent company Repsol. Fernandez said at the time the takeover was part of a push toward resource nationalization and higher energy production.

But analysts and opposition figures said the Chevron deal looked less like a sign of policy flexibility than a step backward in terms of the tough stance that Fernandez has always taken with the private sector.

"The government went right to its knees in order to bring investment here," said Federico Sturzenegger, a center-right candidate running for Congress in the October vote.

A local firm, Bridas Energy, has also signed a preliminary deal with YPF to drill in Vaca Muerta, but Chevron is the first company to finalize investment plans.

The success that Argentina has in attracting more companies to the mega field may depend on concessions offered by the government as it seeks to quell nerves over the 2012 takeover of YPF as well as its heavy-handed regulation of the nation's economy and lingering fallout from its massive 2002 debt default.

Meanwhile, inflation, measured by private economists at 25 percent and exacerbated by generous public spending ahead of the October vote, has added to investor worries.

The financial and political stakes are high for Fernandez. Argentina's trade deficit in energy alone is at $4.5 billion over the last 12 months and it currently imports about a fourth of the natural gas that it consumes.

"The government has realized it needs private investment to develop Vaca Muerta and regain energy self-sufficiency, the lack of which puts a heavy burden on its trade balance and fiscal accounts," said Ignacio Labaqui, who analyzes Argentina for New York-based consultancy Medley Global Advisors.

A U.S. Department of Energy report has shown Argentina holds 802 trillion cubic feet of natural gas trapped in shale rock and 27 billion barrels of oil, the bulk of it located in Vaca Muerta. That would make Argentina the second largest holder of shale gas reserves after China and No. 4 in shale oil.